An Investment Decision-Making Framework Based on Timeless Principles
Authored by Vince Birley
For the past 17 years I was the Chief Strategy Officer for Ronald Blue & Co. This organization has helped thousands of clients seek to achieve financial peace of mind and meet their financial goals by applying technical expertise and biblical principles. During the 2008 financial crisis, I witnessed extreme anxiety from Christians with wealth who were worried about their financial treasure. This was disheartening to me so I embarked on a journey to discover how to make investment decisions based on biblical principles that will create financial peace of mind through understanding and wisdom of the times in which we live.
This effort resulted in an investment framework known as Principled Reasoning. This philosophy is now Ronald Blue & Co.’s investment philosophy that is used with over 6,000 households. In 2013, we also started an investment company, Vident Financial, to implement these principles. In January 2017 I became the CEO of Vident, helping others understand and implement these principles into their lives and their portfolios.
Principled Reasoning is an investment decision-making framework that combines a deep understanding of timeless biblical truths, sound knowledge of economies and investments, rigorous global research, and an in-depth evaluation of risk dynamics. This framework is the underlying philosophy that guides decisions and from which investment processes are developed.
Principle of Applied Wisdom – Foundation of Principled Reasoning
- The world is uncertain but not chaotic.
- Reasonable decisions can reduce exposure to high-risk environments.
- Applying wisdom principles can improve the chance of successful outcomes.
We believe the Bible is the source of truth and that God’s word transcends time and circumstance. As such, we believe that investment success can be enhanced by adherence to the economic and investment principles found in Scripture. The Principle of Applied Wisdom, along with the other five Core Principles, provides a framework for how to invest in a manner that seeks opportunistic returns while addressing the risks associated with investing.
Principle of Uncertainty – Why Saving and Investment Are Important
- The future is uncertain.
- Provision against uncertainty is the reason to plan, save, and invest.
God created humans with all of the abilities and skills needed to steward the world’s resources. He then placed us in the perfect environment to do so. But, the fall of mankind changed everything—giving birth to an unstable environment that does not work as God intended.
Because sin entered our world, we must live with uncertainty, not knowing what the future holds. As it relates to Principled Reasoning, the Principle of Uncertainty is the most important reality we must accept. Because of the uncertainty resulting from the fall, it is prudent for people to save a reasonable amount of resources for their future provision. This is the primary reason to save and invest. The goal is not to accumulate so much that we transfer our hope to our riches, but to save and invest prudently to provide for others and ourselves.
Principle of Human Productivity – How Wealth Is Created
- Productivity results from the combination of human creativity and natural resources.
- Wealth is the result of human productivity.
The Principle of Human Productivity begins with an understanding that God created us to be productive. We know this is true since the concept of work was part of God’s perfect design from the beginning, even before sin entered the world in the Garden of Eden. The Lord God took the man and put him in the Garden of Eden to work it and take care of it (Gen. 2:15). Humans were not created to be idle. By creating us in his own image, God’s desire was for us to use our creative and productive attributes to steward the earth’s natural resources. Even after sin caused work to be hard, our God-given attributes of productivity and creativity are still the source of growth. This principle is important to investing since wealth is more likely to be created where there is growth, and economic growth is higher in environments where human productivity is supported and promoted.
Principle of Leadership and Governance – Where Wealth Is Created
- The manner in which leaders (of governments, corporations, etc.) govern significantly influences the productivity of the people they lead.
- Environments with greater civil and economic freedom tend to provide more fertile ground for investment due to increased human productivity.
The Principle of Leadership and Governance states that the manner in which people are led and governed greatly influences their creativity and productivity levels. The desire for power causes some leaders to hoard resources in an effort to maintain control. This creates a dependent society marked by lower productivity, smaller private capital bases, and possibly even an unstable currency. These factors are likely to decrease long-term returns and increase the possibility of default.
We believe environments that incent people to be productive will create more wealth over the long-term than environments that promote dependency. We believe those who lead with integrity (are honest in their dealings, faithful in their stewardship, and selfless in their execution of just governance) produce better long-term outcomes than those who don’t. We believe leaders who decentralize resources and relinquish control stimulate higher creativity and productivity, larger private capital bases, and a stronger currency.
It is critical to identify the opportunities where good leadership and governance are likely to provide the levels of growth and resulting investment returns necessary to meet clients’ objectives. We believe that investing capital in those nations and companies whose leaders act with integrity and relinquish control of resources creates investment opportunities with lower risks and higher return potential.
Principle of Inherent Value – How to Identify Opportunities
- Investors and markets are not always rational.
- Eagerness for gain or fear of loss can drive investors into bubbles, or crashes.
- Opportunities and risks can be identified using a disciplined valuation process to determine an investment’s inherent value.
Investment prices often do not reflect their true or intrinsic value in the short term. This can happen due to greed (which causes prices to be inflated) or fear (which causes prices to be deflated). Emotions of both investors and markets are volatile and subject to exaggeration. An intelligent process that analyzes an investment’s growth rate compared to its current price can help calculate opportunities and risks. This principle is known as the Principle of Inherent Value.
When purchasing investments, it is not enough to know how and where wealth is created. It’s also critical to look at valuation levels for each asset class to help determine what to buy and sell. Because overpricing greatly limits the opportunity for future performance growth, assets must be purchased at reasonable prices.
Principle of Instability – How to Manage Risk
- Markets and economies are not stable.
- Due to instability, provisions against uncertainty may fail.
- Diversification and appropriate allocations of wealth help manage risk.
Understanding present risks is an important step in making wise investment decisions. As discussed with the Principle of Human Productivity, the concept of risk originated with the fall of mankind in the Garden of Eden. Through scarcity, access to resources like food became less stable. Despite man’s best efforts, even a well-planned execution does not always lead to a plentiful harvest. Thieves might steal, food can spoil, and markets sometimes crash. Because of sin, risk can never be completely avoided. This is the Principle of Instability.
Examples of investment risks include concentrated positions of wealth, incorrect valuations, and currency devaluations, to name a few. Diversification is the most effective way to reduce risk within investment portfolios.
Principled Reasoning Summary
Investors should ask themselves, What does investment success look like? To answer this, certain factors like appropriate risk tolerance and time-horizon requirements of the invested assets (when the money is needed) must be considered. For all investors, however, the answer to this question should result in financial peace of mind and eventual attainment of goals.
Today, investing well is more challenging than ever. Instant access to information and the overwhelming number of investment choices create an anxiety that jeopardizes not only investors’ ability to achieve financial goals but also their peace of mind. Our Principled Reasoning approach to investment decision-making seeks to alleviate this financial anxiety to help meet investors’ return goals by adhering to our six Core Principles. It is the application of wisdom (Principle of Applied Wisdom) that allows us to understand why we need to save and invest (Principle of Uncertainty), how wealth is created (Principle of Human Productivity), where wealth is created (Principle of Leadership and Governance), how to find opportunities (Principle of Inherent Value), and how to manage risk (Principle of Instability). These principles provide the context to evaluate factors that ultimately contribute to investment results: economic growth, inflation, and valuation.
While this process frames how we make investment decisions, we understand that our hope must remain in God, who controls all outcomes. Our responsibility is to be faithful stewards. We believe that following the Six Core Principles found in Principled Reasoning is an integral art of honoring that commitment.
The Appendix with references, citations and Scriptural support are available upon request from Vince Birley at [email protected].
Vince Birley is Co-Founder of Vident Financial, and former Chief Strategy Officer and Chairman of the Investment Policy Committee for Ronald Blue and Co.
The Christian Economic Forum is a select community of marketplace leaders dedicated to improving the world through the advancement of ideas that work, but with a focus on God’s economic principles.
CEF was founded in 2011 with a vision to offer the excellence, scholarship, community and impact of the World Economic Forum but with the foundational purpose to elevate God’s economic principles. We believe that God’s principles offer the only real answer to the world’s economic issues.
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